Classes-To-Go! 6A

When Earnings Grow Faster than Sales

Mary Enright

Sioux Empire Chapter Director

BETTERINVESTING NATIONAL CONVENTION

Disclaimer

• The information in this presentation is for educational purposes only and is not intended to be a recommendation to purchase or sell any of the stocks, mutual funds, or other securities that may be referenced.

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Information ForEvaluating Growth

• Value Line Investment Survey

• Annual Report

• 10K

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Sales And EarningsGrowing At Different Rates

• Any difference can’t last forever

• They must settle into a state ofequilibrium

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BETTERINVESTING NATIONAL CONVENTION

Getting From Sales To EPS

(1) Sales or Revenues- Costs or Expenses

= Pre-tax Profit (PTP)

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BETTERINVESTING NATIONAL CONVENTION

Getting From Sales To EPS

(2) Pre-tax Profit (PTP)- Taxes Paid

= Earnings or Net Income

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Getting From Sales To EPS

(3) Earnings÷ Shares Outstanding

= Earnings Per Share (EPS)

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BETTERINVESTING NATIONAL CONVENTION

Getting From Sales To EPS

Sales or Revenues- Costs or Expenses= Pre-tax Profit (PTP)- Taxes Paid= Earnings or Net Income÷ Shares Outstanding= Earnings Per Share (EPS)

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Simplified “Income Statement” Sales

- Expenses

= Pre-tax Profits

- Taxes

÷ Number of Shares

=Earnings Per Share

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BETTERINVESTING NATIONAL CONVENTION

Explaining The Difference InGrowth Rates

Three Primary Causes:– Change in the expenses per

dollar of sales– Change in tax rates– Change in shares outstanding

We will look at each of these

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Explaining The Difference InGrowth Rates

• Change in the expenses perdollar of sales

• Have profit margins changed?

• Are expenses going up fasteror slower than sales?

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Explaining The Difference InGrowth Rates

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BETTERINVESTING NATIONAL CONVENTION

Explaining The Difference InGrowth Rates

• Change in the tax rate

• Have tax rates changed?– These are also expenses, but not

necessarily under management’s control

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BETTERINVESTING NATIONAL CONVENTION

Explaining The Difference InGrowth Rates

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BETTERINVESTING NATIONAL CONVENTION

Explaining The Difference InGrowth Rates

• Change in shares outstanding

• Have shares outstanding changed?– Are company earnings spread over more

or fewer shares?

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Explaining The Difference InGrowth Rates

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Explaining The Difference inGrowth Rates

• Improving Profit Margin will contribute to Earnings Per Share growing faster than Sales.

• Tax rate decline also contributed to Earnings Per Share growing faster than Sales.

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Explaining The Difference inGrowth Rates

• Be sure to check shares outstanding• A sharp decline in shares outstanding in

2004 is followed by an increase in 2005 and then remaining level

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Difference In Growth Rates

• EPS growing faster than sales

– Check if profit margins are increasing

– Check if tax rates are decreasing

– Check if shares outstanding are decreasing

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Difference In Growth Rates

• EPS growing faster than sales– Cutting costs

•Can this go on forever?•There is a limit to how much you can

cut costs– Buying back Shares

•Can this go on forever?

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Questions?

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